Biz brain: IRS difference between E and H bonds?

Q. In 1992, I exchanged my E bonds for H bonds. The H bonds will no longer be paying interest this month. I am listed as the owner with my four grandchildren as co-owners. I received interest on the bonds and reported the interest to the IRS for the past 20 years. Is there a way to calculate how much I owe in taxes when the bonds expire?— A loving grandmother

A. There are some "ifs" to your answer.

The United States issued series E savings bonds from May 1941 until November 1965, and they earned interest for 40 years, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

"After 40 years, you earned no additional interest if you held on to them. At that point you could either redeem them and pay tax on the accrued interest or you could exchange the E bonds for H bonds," he said.

The new H bonds had a new feature. You could pay the federal tax when you redeemed the bonds or you could opt to pay the tax annually over the life of the bonds, Kiely said.

"This worked especially well with young children," Kiely said. "Normally young children didn’t earn enough interest to owe any tax at all."

For example, if a 2-year-old earned $50 in savings bond interest, you would file a tax return for the child. The child would owe no tax but filing the return indicated the child’s parents’ intention to pay the tax annually, Kiely said. If you kept a copy of that return, the child would not have to file a return in subsequent years until they had enough income to actually owe a tax.

For you to calculate the interest and resulting income tax from the Series E Bonds, Kiely said to remember the old E bond interest is taxed when they are redeemed. Your bonds weren’t redeemed but they were converted to H bonds.

Kiely said when you redeem the bonds, the U.S. government will send you a 1099 INT. Although you mentioned that you have been reporting the interest to the IRS, you weren’t clear on whether or not you’ve been paying taxes on the interest all along, said Michael Steiner, a certified financial planner and certified public accountant with RegentAtlantic Capital in Morristown. "If you have been paying taxes each year, then the only taxable amount will be the interest earned during the current year," he said. "If you have deferred paying taxes on the interest each year, then you will have to pay taxes on all of the accrued interest in the year that the bonds are redeemed."

Visit the Treasury Direct web site (treasurydirect.gov) and you’ll find many calculators that will help you.

Finally, Kiely reminds you that U.S. savings bonds will not be subject to New Jersey taxes.